We have maintained our Neutral recommendation on
General Dynamics Corp.
) on Nov 25, 2013. The defense major currently retains a Zacks
Rank #2 (Buy).
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Why the Reiteration?
General Dynamics is one of the largest U.S. defense contractors
whose revenue exposure is spread over a broad portfolio of
products and services that help it to keep the overall growth
momentum steady. The company is one of the two contractors
equipped to build nuclear-powered submarines in the U.S.
The company's top and bottom line succeeded in meeting the Zacks
Consensus Estimate in the third quarter of 2013. The decline in
operating expenses in the reported quarter demonstrates that the
company is proactive in lowering costs and improving
Although the company will continue to incur expenses for
adjusting its operations to market conditions, we believe the
recent moves would help improve performance. These include
consolidating the Weapons Systems business into the Munitions
business and combining the U.K. business into the North American
Mobile Communications operation.
Notably, jet sales at the Gulfstream business are continuing to
see traction even in the slowing defense sales scenario. The $60
million top-of-the-line G650 large cabin business jet is in high
demand, with orders booked for the next five years. Gulfstream is
expected to contribute more significantly to General Dynamics'
earnings going forward.
In fact, strong Gulfstream margins driven by the G650, along with
execution from Combat Systems and IS&T, drove most of the
third quarter beat. The company expects an increase of
approximately 17% in the group's full-year revenues in 2013
compared with 2012 driven by continued strong deliveries of
However, we remain on the sidelines owing to the threat of
sequestration and defense budget cuts that continue to impact the
backlog. General Dynamics ended the third quarter with a total
backlog of $47,941 million, down year over year as well as
quarter over quarter.
Other Stocks to Consider
Apart from General Dynamics, other defense stocks worth
The Boeing Co.
Lockheed Martin Corp.
Northrop Grumman Corp.
), all with a comparable Zacks Rank #2 (Buy).